Warren Buffett, Small Captives and the IRS "Dirty Dozen"

What does Warren Buffett have to do with small captive insurance companies and the IRS “dirty dozen” list? Until this week, my answer would have been, “very little.” However, after addressing the IRS placing small captive insurance companies (CICs) on its “dirty dozen” list in last week’s edition of Captivating Thinking, the Oracle of Omaha, as Buffett is affectionately known, provided even more evidence in support of our already overwhelming arguments against the Service’s pronouncement.

Remember that the IRS has often attempted to argue that only “core insurance” or replacing third party commercial insurance constitutes real insurance. In their “dirty dozen” write-up, they suggested, insurance “policies [that] cover ordinary business risks or esoteric, implausible risks,” are not real insurance. As we noted last week, the esoteric and implausible threats they describe are often the existential threats that can completely wipe out small and mid-market companies (examples include cyber attacks, business interruption, terrorism, pandemic disease outbreaks, power grid failure, biological and nuclear attacks, etc.)

Last week, we noted the both the U.S. Tax Court and FEMA (Ready.Gov) disagree with the IRS on what constitutes real risk and real insurance. And, this brings us to Warren Buffett, the billionaire mega-investor who released his 31 page annual shareholder report this week. His report was summarized by Liz Claman of Fox Business Network, and she pointed out that while the report was characteristically optimistic about America and Berkshire Hathaway’s future, she was struck by Buffett’s biggest worry. In her words:

And those fears? It’s not all sweetness and light in Omaha. Buffett expressed his biggest worry in the letter: “There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business.”
Buffett may be an optimist but if he’s anything, he’s reasonable. And having covered him for years, I’m guessing Iran and ISIS have him up at night, drinking Cherry Coke and … thinking. Thinking more.

Notice what Liz says…”if he’s anything, he’s reasonable.” We agree. Ready.gov and the U.S. Tax Court agree as well. Perhaps Mr. Buffett would sleep better if he knew the IRS doesn’t consider his concerns to be real or insurable threats.

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